Commodity futures used by companies cover the risk of negative price fluctuations. The objective of the hedging is to avoid losses due to potentially unfavourable price changes, rather than speculating. Many companies that ensure the use or production of the core assets of a futures contract. Farmers, oil producers, ranchers, producers and many others are examples of the use of products for safety purposes. Commodity futures can be very risky for inexperienced people. The high level of leverage used in commodity futures can increase profits, but losses can also be amplified. If a futures contract loses money, the broker can launch a margin call, which is a requirement for additional funds to support the account. In addition, the broker usually has to approve an account to act on margins before he can enter into contracts. The coverage of a product can lead a company to miss favorable price movements, since the contract is fixed. The farmer decides to imprison the selling price of $15 a bushel by selling enough one-year soybean contracts to cover the crop. The farmer needs 200 futures contracts (1,000,000 scheffel needed / 5,000 scheffel per contract – 200 contracts). Traders can use commodity futures contracts to set the selling prices of their products weeks, months or years in advance. Many investors confuse futures with options contracts.
For futures contracts, the holder is required to act. Unless the holder terminates the futures contract before expiry, he must either buy or sell the underlying at the stated price. Suppose, for example, that with an initial margin of $3,700, an investor could enter into a futures contract of more than 1,000 barrels of oil worth $45,000, with an oil price of $45 per barrel. If the oil price is trading at $60 at the end of the contract, the investor has a profit of $15 or a profit of $15,000. Trades would stand out through the investor`s brokerage account and credit the net difference between the two contracts. Most futures contracts are settled in cash, but some contracts are settled with the delivery of the underlying to a central processing warehouse. For example, suppose a farmer expects to produce 1,000,000 soybeans over the next 12 months. As a general rule, soybean futures include the amount of 5,000 bushels.
The farmer`s break point on a bushel of soybeans is $10 a bushel, which means $10 is the minimum price needed to cover soybean production costs. The farmer sees that a one-year soybean futures contract is currently priced at $15 a bushel. If a company traps the price and prices rise, the producer would have a profit on the protection of raw materials. The benefit of the cover would offset the increased purchase costs of the product. In addition, the company could take over the supply of the product or offset the futures contract that derives the net difference between the purchase price and the sale price of the futures contracts. Given the considerable leverage of futures trading, a small movement in the price of a product relative to the initial margin could result in significant gains or losses. Speculation on futures contracts is an advanced trading strategy and is not suitable for the risk tolerance of most investors. Unlike options, futures are the obligation to buy or sell the underlying. As a result, the non-closure of an existing position could lead an inexperienced investor to take over a large quantity of unwanted goods.
Product coverage can cause a company to run out of favorable price movements, since the contract is blocked at a fixed interest rate, regardless of the price of the commodity. If the company has also miscalculated its product and over-hedge requirements, the result may be that the futures contract must be terminated for a loss when it is resold to the market. Commodity futures